Pensions drawdown: don't take too much money out of your pension fund
New evidence suggests people are depleting their pensions too quickly – and they risk running out of cash in retirement.
Tens of thousands of savers with large pensions are making withdrawals at such rapid rates that they risk running out of cash in retirement, new data from the Financial Conduct Authority (FCA), the City regulator, reveals.
The statistics suggest that while people with larger pension funds are less likely to be making substantial withdrawals, a significant number of savers are still taking out more than 6% of their money each year – and many are taking out 8% or more. But the data on withdrawals from pension funds, which became far easier to make following the 2015 pension freedom reforms, has long been a source of dispute.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, the FCA’s data does not provide a consolidated view of savers’ finances: the assumption has always been that a significant proportion of those making substantial withdrawals from small portfolios of pension money also have larger plans to fall back on – and that they are being more restrained with these. The regulator’s latest figures, however, suggest this assumption may be optimistic. The figures show that while large withdrawals are more common with smaller pensions, many large ones are also being depleted rapidly.
Of pension portfolios where savers are applying an 8% withdrawal rate or higher, 67% were valued below £100,000; but in 24% of cases, the overall pension was larger. This equates to more than 30,000 savers who are taking 8% of their pension money out each year.
Always take advice
Pension experts describe withdrawals of this size as highly unlikely to be sustainable. While the amount that savers can take out of their pensions each year without running out of money later in life will depend on a variety of factors – including investment returns and charges – most experts think a withdrawal rate of no more than 3% a year is more realistic. To add to the mounting concern over the issue, the FCA’s data also reveals an increase in the number of people who do not take financial advice before entering into income drawdown contracts that allow them to make this sort of withdrawal. More than a third of savers are starting drawdown plans without getting professional financial advice, the regulator’s statistics reveals.
Another worry to keep in mind is that watchdogs have begun to notice a marked increase in the number of scammers targeting pension savers with drawdown plans since the beginning of the Covid-19 pandemic.
Action Fraud has warned that with more people now conducting all their financial affairs online or by phone, the potential for fraud has increased substantially.
-
Best places to live in England and Wales in 2026 – and how much they costCriteria like value for money, natural beauty, good schools, jobs and a high quality of life are key for those looking at areas to buy a house – but how much will it cost you to live in a high ranking town or city? We reveal the best places to live in England and Wales.
-
London house prices: Is the capital's property boom over?Buyers and investors have always been drawn towards the capital’s property market. But as house prices stall, is the market as lucrative as it once was and are buyers and investors still interested?
-
ISA reforms will destroy the last relic of the Thatcher eraOpinion With the ISA under attack, the Labour government has now started to destroy the last relic of the Thatcher era, returning the economy to the dysfunctional 1970s
-
Investing in forestry: a tax-efficient way to grow your wealthRecord sums are pouring into forestry funds. It makes sense to join the rush, says David Prosser
-
'Expect more policy U-turns from Keir Starmer'Opinion Keir Starmer’s government quickly changes its mind as soon as it runs into any opposition. It isn't hard to work out where the next U-turns will come from
-
Why pension transfers are so trickyInvestors could lose out when they do a pension transfer, as the process is fraught with risk and requires advice, says David Prosser
-
Modern Monetary Theory and the return of magical thinkingThe Modern Monetary Theory is back in fashion again. How worried should we be?
-
The coming collapse in the jobs marketOpinion Once the Employment Bill becomes law, expect a full-scale collapse in hiring, says Matthew Lynn
-
How pet insurance can help cut the costs of vet billsYou can temper the expense of vet bills with pet insurance. There are four main types to consider
-
Rachel Reeves's punishing rise in business rates will crush the British economyOpinion By piling more and more stealth taxes onto businesses, the government is repeating exactly the same mistake of its first Budget, says Matthew Lynn
